Now, a year later, Mr. Carr has replied to his critics with a new book,
"Does IT Matter?" (Harvard Business School Press).

It's a good book. Mr. Carr lays out the simple truths of the economics
of information technology in a lucid way, with cogent examples and clear
analysis.

His basic point is straightforward. At one time, information technology
was so expensive and so difficult to manage that companies could make
large amounts of money simply by being able to make systems work. (Think
I.B.M.)

Companies that lacked the skills to manage information technology
effectively suffered compared with competitors that had mastered those
skills. But over the years, as information technology has become cheaper
and more manageable, this source of competitive advantage has been reduced
and perhaps eliminated. Hiring knowledgeable employees is much easier than
it used to be, and the tools to manage this technology are far more
powerful than they were a few short years ago. Nowadays anybody can set up
a Web server, or an accounting system, or an inventory management
system.

The ability to manage technology effectively is no longer the barrier
to entry it once was. Hence, it no longer serves as a source of
competitive advantage.

So it is with every new technology. When electric motors became small
enough to drive individual machine tools, it became possible to set up
assembly lines and greatly improve productivity.

Henry Ford and his colleagues created the assembly line and other
techniques of mass production in the formative days of the automobile
industry and enjoyed a significant advantage over their competitors for
nearly 20 years.

But by the end of the 1920's, all automobiles were made using the
techniques Ford
pioneered, and his competitive advantage disappeared. The playing field
tipped toward General
Motors, which had developed more flexible procedures that allowed it
to offer frequent updates in model styles. Knowing how to run an assembly
line no longer conferred a competitive advantage, because everyone knew
how to do it.

According to Mr. Carr, knowing how to use information technology is
like knowing how to run an assembly line. It is a utility now, like
telephone service or electricity.

Asking whether information technology matters is like asking whether
electricity matters. In one sense it certainly does - without electricity,
commerce would grind to a halt. But skill in the management of electricity
isn't particularly useful to most companies, since electricity is now so
cheap and so commonplace that it can't really be a source of competitive
advantage to anyone.

Profit comes from scarcity. Companies that can provide products or
services that others can't provide can charge premium prices. As more and
more companies are able to supply something, competition works its magic
and forces prices down.

"Complexity management" can still serve as a barrier to entry in some
industries. Making integrated circuits is fiendishly complex, and Mr.
Barrett of Intel is certainly right when he says information technology is
critical in his industry.

But as he would readily agree, it is not the whole story. A potential
competitor could go out and buy the same technology that Intel uses and
still fail miserably in trying to compete with it.

Even Intel doesn't know quite why some chip manufacturing processes
work better than others. In the late 1990's it instituted a program called
"Copy EXACTLY!," which required that new plants use equipment and
procedures replicated from existing plants, right down to the color of
paint on the wall.

When a technology is so complex that the only way to make things work
is to copy what you already have in place, you have a competitive
advantage. After all, only the incumbents have something to copy, which
makes it difficult for new companies to enter the industry.

But most businesses aren't as complex as chip manufacturing. If someone
makes money selling fruit-flavored iced tea, you can be sure that other
competitors will soon spring up. And if one of them gains some temporary
competitive advantage by building an inventory management system, the
others will soon follow.

So Mr. Carr's main thesis is right. It is not information technology
itself that matters, but how you use it.

But even though it is true that when information technology is turned
into a commodity it no longer serves as a source of unique competitive
advantage, we still face a critical question: Are we now at that
point?

Standardization and commoditization of a technology don't always mean
that innovation stops. Once products become commodities, they can serve as
components for further innovation.

In the 19th century, American manufacturers created standardized
designs for wheels, gears, pulleys, shafts and screws. As such
standardized parts became widely available and could be purchased "off the
shelf," there was an outpouring of invention.

Sewing machines made clothing manufacture cheaper. Farm equipment made
planting and harvesting cheaper. The locomotive made transportation
cheaper. By the end of the century, the groundwork had been laid for the
automobile and the next wave of innovation involving power tools and mass
production.

In the 19th century the real innovations came after the basic building
blocks were commoditized.

Perhaps information technology is like those standardized parts.
Desktop PC's, Web servers, databases and scripting languages have become
components in larger, more complex systems. As these components have
become more standardized, the opportunities to create innovations have
multiplied.

Do such innovations offer "sustainable competitive advantage"? Maybe,
maybe not. Truly sustainable competitive advantage is a high hurdle. Doing
something better and cheaper than the competition is always valuable, even
if the competitive advantage is only temporary.

In my view, companies cannot afford to ignore information technology,
or relegate it to the back burner. Commoditizing it does not necessarily
mean innovation slows. If anything, it could accelerate as more and more
innovators experiment and tinker with those cheap, ubiquitous information
technology commodities.

Hal R. Varian is a professor of business, economics and information
management at the University of California,
Berkeley.